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How Do CPG Companies Stay Ahead Of Disruption?

Andrew Duguay is a senior economist with Prevedere Software. I help Fortune 500 companies plan for tomorrow.

Getty

Getty

Overall, the economy is in a good place. The consumer is strong, wages are growing and employment is nearly full. Having said that, the gap between prices and wages has been narrowing. Although the conditions are positive heading into the holidays, most indicators suggest slower growth in 2019. Tax reform led to a trillion-dollar stimulus last year, but that was a short-term boost that can’t be counted on moving forward. The economy will likely continue to grow over the next couple of quarters, but the pace of economic growth is likely peaking right now. With interest rate and inflationary pressures bearing down, it would be wise for consumer packaged goods companies (CPGs) to prepare for cooling growth.

So, what does this mean for CPGs? Does it mean they should start sounding the alarm? No, but it does mean that it would be prudent to start future-proofing themselves. Established CPGs must take advantage of this positive economy, which affords them more runway to experiment and invest in transformative action. Otherwise, they stand to lose more market share to new market entrants.

Established CPGs are facing disruption at the hands of upstarts that are changing the economic model and have more leeway to compete. Many new CPGs are selling directly to the consumer, which is undercutting the efforts of established CPGs. The CPG industry is also seeing substantial venture capital activity. Over the past decade, central banks and their accommodative policies have created favorable conditions for borrowing, including lower interest rates. This gives startups the leverage to gain a foothold in the industry.

In many cases, startup CPGs do not need to show profitability for several years since the initial goal is often to increase market share. Amazon itself was not concerned about profitability for the first decade. Their chief goal was disrupting retail. When VCs see disruption, they attempt to replicate that disruption, which creates these cycles of disruption. We’re now seeing a cycle of disruption, and we’ll likely see another influx of market entrants. This gives startups a competitive advantage over established CPGs.

How can blue-chip CPG companies compete with startups in this environment? There are three approaches they can take: outspend them, buy them or innovate. Outspending them includes creating market opportunities and buying market exposure. This can come in form of ramping up marketing and advertising as well as expanding retail distribution and customer acquisition efforts.

Buying them is also an option, although this can be a tricky proposition since it’s not always easy to determine the right timing for an acquisition. On the one hand, you want to stem market share loss as quickly as possible. On the other hand, you don’t want an acquisition to be so costly that you end up with a Pyrrhic victory.

Innovating is a good option, especially within current market conditions. An inherent benefit of the innovation approach is that it’s proactive instead of reactive. It’s acting from a position of strength versus a compromised position. However, this approach only works if the economy is strong and your pockets are full. Innovation will also set blue-chip companies up for long-term success if done properly, but if they wait too long, economic growth may shrink, and the extra runway will disappear, forcing established CPGs into fight-or-flight mode. Given we are at or near peak growth in the U.S. economy at the moment, now is the time to plan ahead and innovate.

CPGs should pay special attention to the millennial consumer. They are older now and fully in the workforce, with the youngest of this generation leaving undergraduate school and the oldest set in their 30s. In other words, they are in the prime part of their career for increasing earning potential. There are big spending years ahead for millennials, so it makes sense to prioritize them in your customer targeting efforts.

When targeting millennials, it’s important to understand what makes them unique. Millennials value experience and, contrary to previous generations, they shop for needs instead of products. They also value personalization. The combination of these attributes creates an opportunity for CPGs to create customized experiences addressing millennial needs.

In sum, blue-chip CPGs are facing disruption, but the current economy gives them an opportunity to insulate against market share drain by investing in innovation. Innovation does not happen in a vacuum. They must innovate with current and future customers in mind. Since millennials will be a big part of those efforts moving forward, CPGs need to cater to their specific habits and needs. If CPGs take these precautions now, they’ll be that much better off when economic growth inevitably slows down.